Will we pay less from income, more for goods and services?

Published: Friday, February 8, 2013 at 06:36 PM.

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“The economy has slowly evolved to become much more of a service economy,” says Van Lear.

And most transactions are not taxed.

Lawmakers are gravitating toward a plan that could tax pet grooming, massages, dentistry, real estate agent services and 100 or more others.

The real estate community has been the most outspoken about the most recent tax reform debate, largely thanks to a transfer tax that Realtors say could leave developers, sellers and buyers paying taxes on the same property three or more times.

There remains the problem of a services tax taking a bigger bite out of budget for the poor, says Van Lear.

And Hoyle points to another hurdle in levying a service tax. A lot of new people would now be responsible for collecting and handing over tax money to the state.

“There are hundreds of millions in sales taxes legitimately owed to the state that are not being remitted,” said the former revenue secretary. “You’re opening a door for more people to do the same thing — and with more money at stake.”

North Carolina lawmakers have talked about simplifying tax code for decades. The argument has long been focused on creating a system that encourages economic growth and lets the people who make money in the state keep more of that money in their pockets.

This year’s talks seem to be gaining traction in Republican-controlled Raleigh. The senior member of the powerful Senate Finance Committee — Sen. Bob Rucho of Mecklenburg —is publicly pushing the issue.

The shape it could take:Sales and services tax instead of corporate and personal income tax.

The idea of eliminating state income tax in individuals and corporations is getting the most attention from lawmakers, although no bill is yet on the table.

Rucho’s is the plan most of Gaston’s leaders refer to this year when they’re talking tax reform.

Leaders have touted the idea of replacing that major revenue stream — personal income taxes make up more than half the state’s budget, although corporate tax dollars contribute only around 5 percent — with an expanded sales tax and one that would add a percentage to services.

Think haircuts and manicures, accounting or engineering services, and transactions such as billboard, newspaper or magazine advertising in some cases.

A real estate transfer tax, unpopular with the state’s embattled Realtors in a post-housing-crash environment, is another part of the floated plan.

So is a business license fee.

On corporate income tax

Advocates in favor of eliminating the state’s 6.9-percent corporate income tax argue the measure would attract more jobs and investment.

It’s not a new idea.

Democrats raised the prospect when the party controlled North Carolina’s Legislature.

It remains among the most popular ideas for regional lawmakers in a Republican-controlled House and Senate.

Corporate taxes generally make up about $1 billion of the state’s roughly $19 billion budget.

International corporations and companies with a presence in other states have tools for moving money, meaning they have more tools for paying less to the state in taxes.

The companies that pay the full 6.9 percent are those with all their operations in North Carolina.

And the enforcement system means a much larger drain on time and other resources for the Revenue Department, says Gaston’s David Hoyle, who served as revenue secretary for Gov. Bev Perdue until this year.

So foregoing that small percent of the budget and offering true North Carolina corporations the opportunity to invest more in their businesses is the easy argument.

On courting corporations

What muddies the tax reform water is the role of taxes — and tax breaks or tax credits — in economic development.

North Carolina’s biggest incentives for luring jobs to the state are based on offering corporations credits on corporate income or refunding money based on payroll taxes.

Current and past lawmakers are critical of incentives, bowing to the practice, they say, because competitiveness between states demands it.

During his 18-year tenure in the Senate, Hoyle often held up elimination of the corporate income tax as a way to do away with the incentives.

“They wouldn’t need them because the corporate income tax is repealed,” he says. “You level the playing field and you treat everybody fairly.”

People in the business of wooing industry don’t agree.

Texas is a no-income-tax state local leaders point to as an example of what the system can create. Texas also has the country’s largest deal-closing fund. It offers cash for companies willing to locate there.

Since 2010, the fund has awarded more than $96 million to corporations.

That’s more than that $60 million North Carolina’s equivalent, the One NC fund, awarded in the five years from 2007 to 2011.

The state would need a bulked up incentive account if the tax-supported methods go away, insists Donny Hicks, executive director of Gaston’s Economic Development Commission.

“Nobody comes for free,” he said.

The elimination of corporate income tax would make a long-term difference in recruiting industry and the jobs that follow, Hicks says.

Alone, it wouldn’t have employers lining up at the border.

Given the cost of building and equipping the manufacturing projects the county often chases, the up-front money states offer is a bigger immediate benefit to corporations considering expansion or location.

On personal income tax

More than half the state budget comes from the money its residents pay.

The rate, which ranges from 6 to 7.75 percent, has a maximum that assesses the North Carolina’s wealthiest residents the highest taxes in the Southeast.

Doing away with personal income taxes could help attract high earners, Hicks says.

And for a corporate headquarters or major office complex, the move could make the state more appealing.

“Long term it creates an attractive operating environment,” he said.

On sales tax

Economists look at sales tax in two different ways.

One side holds that a tax is basically a discouragement to the thing on which it’s placed.

So why deter income and payroll?

Instead, if taxes are necessary, tax based on the things people must consume.

On the other end are economists who call a sales tax regressive. In other words, it hits the poor harder.

Every buyer might pay the same dollar amount for each tax on each item. But that dollar amount makes up a bigger part of your budget the less money you earn.

He sees other problems with the idea of relying on a sales tax, especially one meant to take the place of more than half the state budget.

Any tax put directly on purchases or services tends to slow growth, according to Van Lear.

He adds that taxes seem to have a bigger effect on spending — the thing that drives the economy — than on work.

We have little choice but to work.

Spending allows more wiggle room.

On services tax

“The economy has slowly evolved to become much more of a service economy,” says Van Lear.

And most transactions are not taxed.

Lawmakers are gravitating toward a plan that could tax pet grooming, massages, dentistry, real estate agent services and 100 or more others.

The real estate community has been the most outspoken about the most recent tax reform debate, largely thanks to a transfer tax that Realtors say could leave developers, sellers and buyers paying taxes on the same property three or more times.

There remains the problem of a services tax taking a bigger bite out of budget for the poor, says Van Lear.

And Hoyle points to another hurdle in levying a service tax. A lot of new people would now be responsible for collecting and handing over tax money to the state.

“There are hundreds of millions in sales taxes legitimately owed to the state that are not being remitted,” said the former revenue secretary. “You’re opening a door for more people to do the same thing — and with more money at stake.”

There’s been talk of excluding business-to-business dealings from the tax requirement, although no specific bill has been filed in the Legislature to clarify.

Lawmaker reaction

N.C. Rep Dana Bumgardner

Republican

Gaston County

“Right now this is all talk so there’s no bill to support or not support. I understand the goal would be to eliminate income taxes. “

…

“It’s just a change in the method of funding the state government. It’s worked wonders for Florida and Texas. We do have a high income tax and I’m in favor of people who earn money being able to keep more of it.”

…

“A sales tax taxes everyone, not just people who earn a living so it certainly could be looked at as being more equitable.”

N.C. Rep. Kelly Hastings

Republican

Gaston, Cleveland counties

“I do support cutting taxes. That’s first and foremost but I think it’s fair to let everyone know I’ve fought against the real estate transfer tax for years.”

…

“I made a commitment and a promise to fight a new and higher sales tax on real estate services 14 years ago before I became an elected official through the state association of Realtors. I plan to keep my word.”

Rep. John Torbett

Republican

Gaston County

“Understand that the plan now is still in the conceptual stage. … I don’t really see anything I really disagree with. It seems like a great approach. You broaden the participation.”

…

“We’re not looking for additional revenue in the state. Also, the people who will have to pay more for nails and hair will be paying less in income taxes. Right now the numbers look favorable to individuals.”

…

“I think we’ll have tax reform this session. I don’t know what kind.”

…

“Everyone out there knows they have to contribute something. Nobody wants to pay taxes. But if we can spread that fair share out, we can lower the impact on everyone.”

Sen. Kathy Harrington

Republican

Gaston County

Email response from legislative assistant:

Sen. Harrington looks forward to reviewing a bill on tax reform when it is filed. She will comment on a proposal once she is able to review the details.